The recent headlines surrounding Clear Channel Communications offer a stark illustration of just how rocky the M&A pathways can be as of late. The story goes back to late 2006, when private equity firms Bain Capital and Thomas H. Lee Partners (THL) agreed to purchase the firm for $39.20 per share. In March 2008, with the transaction yet to be completed, Bain and THL filed suit against six banks who had committed to finance the deal, alleging that they had reneged on their commitment. “It seems clear that lenders' remorse set in when credit markets worsened,” the companies asserted in a press release.

Clearly, the market for private equity deals has changed. However, for savvy acquirers, particularly strategic buyers, this shift means a better chance of unearthing great buys. “If you kept your powder dry, there are a lot of good opportunities,” says Steven Bernard, a Chicago-based director of mergers and acquisitions analysis with Robert W. Baird & Co.

A case in point is the acquisition by Arrow Electronics, Inc., of the Asia-Pacific components distribution business of Achieva Ltd. “We want to be a bigger, more significant player in rapidly growing markets like Asia Pac,” says Paul Reilly, senior vice president and chief financial officer with the Melville, N.Y.-based distributor. The Achieva acquisition, along with seven others over the past few years, is integral to that strategy.

To undertake these acquisitions, Reilly and his team first strengthened Arrow's balance sheet. The company completed a second offering in 2004, receiving about $300 million. Strong annual earnings — net income almost doubled between 2004 and 2007, jumping from $208 million to $408 million — and positive cash flow for the past five years also have bolstered the company's equity base.

Focusing on the basics has also helped, Reilly says. Employees made sure that customers were complying with credit terms, set up electronic payment systems, more closely monitored inventory — inventory values actually dipped by about 1 percent between 2006 and 2007, even as sales grew from $14 billion to $16 billion — and aligned compensation to reward better balance sheet management. As a result, Arrow's balance sheet currently sports about $450 million in cash, and the company can call on $1.4 billion in untapped credit facilities. “We can afford to be aggressive, take advantage of our competitors' weaknesses, and get companies that come on the market,” says Reilly. “We can use our strength to be opportunistic.”

The Achieva acquisition is a sign of the times. Even as overall M&A has tumbled since the start of the year, strategic deals, while down, haven't fallen as far. “We're now seeing strategic buyers that may have been squeezed by private equity before,” says Bernard.

The total value of global mergers and acquisitions hit $652.6 billion in the first quarter of 2008, reports Dealogic. This is a drop of 41 percent from the first quarter of 2007 and a decline of 44 percent from the fourth quarter of 2007. Strategic deals, or those done to bring together two operations that complement each other, sustained a less dramatic drop, Dealogic reports. The overall volume of $567 billion in the first quarter of 2008 was off 2007's first quarter total by about one-third, while the number of deals actually rose by about 8 percent.

In the U.S., the number of mergers and acquisitions totaled 866 for January 2008, a dip of about 5 percent from the 912 deals done in January 2007, according to the February 2008 M&A Market Analysis by Robert W. Baird & Co. The total value of the deals dropped more dramatically, declining from $92 billion to $59 billion, according to the report.